Effective Date:

Applicable FAM Policies: 510 - Tangible Capital Assets

Applicability: GNWT Departments and Public Agencies

INTERPRETATION

Information Technology Systems (ITS) investments must use the component approach. It is common with ITS that certain expenditures, often at the preliminary stage or near the end of the project; do not meet the definition of a TCA. These expenditures must be removed from the cost of the TCA and expensed.

Departments must receive approval from the Comptroller General for any ITS that performs financial transactions. An analysis must be prepared which demonstrates the need for a separate system (i.e., inability of the existing system to perform required functions), all one-time and ongoing costs, benefits, as well as the security and reliability of the new asset.

Costs of planning and development required to substantiate the business case for an ITS investment are to be expensed as incurred. The business case must segregate qualifying capital and operating costs related to the key stages of an ITS investment.

Preliminary Project Stage

The costs related to research and development that normally are associated with the development of a Request for Proposal or Tender for and ITS investments are capital expenses.

Development and Implementation Stage

Capital expenses include costs associated with the following:

• operating systems software including activities such as delivery, configuration, installation, testing and training specific to implementation activities
• middleware software when implemented as part of a qualifying capital project including activities such as configuration, installation, testing and training specific to implementation activities
• application software including activities such as design, software configuration, coding, installation testing and training specific to implementation activities

All Direct costs are to be capitalized. Direct costs of materials and services incurred to develop/configure computer software include fees and travel costs paid to any third parties for services provided during the application development/configuration, and costs incurred to obtain computer software/hardware from third parties. Additional direct costs, such as advertising, legal, insurance, etc., are to be included in the capital cost.

Compensation and benefits costs for employees who are considered incremental labour for the project qualify as capital expenses. Costs for employees include any training or travel required to obtain the skills to implement the applicable technology solution.

Direct incremental overhead costs incurred during the development activity are also capital expenses. Examples of direct overhead costs include the cost of additional leased space required to accommodate staff dedicated to a project and the expenses (e.g. utilities, supplies, furniture, network installations and wiring, phones) associated with operating this leased space.

Any one-time licensing fee in order to use the software acquired should be capitalized. Any licensing fee that is not a one-time (e.g. a yearly licensing fee which typically covers maintenance and upgrades automatically provided by the vendor) indicates that any service potential or future economic benefits obtained will normally expire when the next payment is due. The fee is to be expensed if the system is in service, however a portion is to be allocated to capital for any period applicable to when the system was not yet in service.

Conversion of existing data required to use the new system must be included in the cost of the ITS as it is a required cost to bring the asset into the condition necessary for its intended use.

Replacement of interfaces that previously existed and creation of new interfaces are considered technical functionality and included in any ITS investment when part of a larger qualifying capital project.

Post-implementation operational costs, including internal training (e.g. end-user training), post implementation reviews, and ongoing support and maintenance costs are to be expensed as incurred.

New Versions and Upgrades

Significant upgrades and enhancements are defined as modifications to enable the software to perform tasks that it was previously incapable of performing (i.e. new functionality). Upgrades and enhancements normally require new software specifications and may require a change to all or part of the existing software specifications.

These costs are considered betterments and will be capital expenses if they increase the functionality or service potential of the software. Examples include modifications that result in an increase to the previously assessed service capacity, lower the associated operating costs, extend the useful life, or improve the quality of output. As an example for a large IT project costs should segregate like-for-like activities as operational expenses and new functionality as capital expenses.

The nature of new versions of software should be reviewed in determining the appropriate accounting treatment. If a new version replaces the old version, then the cost and accumulated amortization of the old version should be written down to zero, resulting in a charge to an appropriation equal to the net book value of the old version. The new version would be capitalized and amortized over its estimated useful life. When the new version updates and/or enhances the existing functionality of the old version (e.g. additional modules) then both old and new versions would be amortized over the original useful life, or revised useful life, if significantly different.

Departments shall obtain direction from the Office of the Comptroller General – Accounting Services on the appropriate accounting for any new version released or upgrades before costs are incurred.

Software patches and maintenance are current year operational expenses. Examples of maintenance include post-implementation coding changes required for the software to remain current to meet user needs (such as to meet changes in legislative requirements), or changes required for systems to remain compatible. Patches are new versions of software which contain primarily "bug fixes" (i.e., do not deliver new functionality) that merely correct errors in previously promised functionality.